Set up VAT

When you create a new company, you are asked about VAT in the Company Setup wizard.

Select VAT preferences

You can complete the wizard as shown in the following procedure.

To select VAT preferences, select Yes and click Next.

Provide your VAT registration number (nine digits in the U.K.), your VAT reporting period and indicate if you use the cash or the accrual accounting scheme for VAT as directed by your official registration with HM Revenue & Customs. You can choose between monthly, bimonthly, quarterly and annual VAT accounting schemes. Click Next and complete the setup of your company.

VAT preferences in Preferences dialog box

If you did not set up your VAT preferences when you set up your company, you can use the VAT tab in the Preferences dialog box.

Make sure your VAT reporting period, ending period and accounting scheme (accrual or cash) are correct and click OK. You can change among the schemes and periods later if needed.

The two VAT accounting schemes and VAT codes are explained in the following sections.

Accrual and cash accounting schemes for VAT

Note the following about the cash accounting scheme:

Some small businesses with an annual revenue below a certain limit (£600,000) may report VAT using the cash accounting scheme even though they use the accrual accounting scheme to keep the rest of their accounting records.

In the cash accounting scheme, the tax point for input and output tax is the later of the date of the invoice or the date the payment was received.

The main advantage of the cash accounting scheme for VAT is that it improves cash flow where customers are slow to pay and VAT does not have to be paid on bad debt customers.

Note that the cash accounting scheme only governs when VAT is reported, and not what is reported (except for bad debt).

The other method is called the accrual accounting scheme for VAT, where you are liable to pay your VAT after it has been invoiced, regardless of whether your customers have paid the invoices.

The small businesses who qualify for the cash accounting scheme may also elect to report VAT on accounts using the accrual accounting scheme, where VAT payments can be made on accounts during the year and VAT returns only filed once per year. This reduces administration.

Office Accounting 2008 handles both the cash and accrual schemes. You can also make payments on accounts between the filing of VAT returns. Unlike some accounting programs, in Accounting 2008, you can switch between schemes. If your company grows beyond the cash accounting scheme, you can switch the scheme in the Preferences dialog box, and the subsequent return will be calculated on accrual basis (or vice versa).

HM Revenue & Customs VAT agency

VAT is collected on behalf of the British government, represented by HM Revenue & Customs. Accounting 2008 automatically sets up HM Revenue & Customs as the VAT agency when setting up a new company.

HM Revenue & Customs VAT agency in Accounting 2008

HM Revenue & Customs is a special supplier, only used for VAT reporting. (A separate HM Revenue & Customs supplier is set up for payroll taxes.) As shown in the header, HM Revenue & Customs – VAT – VAT Agency, HM Revenue & Customs is a VAT agency rather than a supplier in this case.

Note that if your company is registered for VAT outside the U.K., it is not possible to set up multiple VAT agencies. This must be handled manually.

The form also provides a Details tab, a Financial History tab, and a User-Defined Fields tab.

Details tab

The Details tab lists the terms, the bank account information (for BACS payments) and the nominal accounts where the VAT amounts are posted:

The VAT Liability Account is used for the net amount owed to HM Revenue & Customs, as the total balance for all VAT returns, VAT payments and VAT refunds. A negative balance means that HM Revenue & Customs owes you money.

The Purchase/Input VAT account is used for input tax on all purchases.

The VAT on Sales account is used for output tax on all sales.

The EC Acquisition VAT account is used for recording output tax for all EU acquisitions.

Financial History tab

The Financial History tab lists all the VAT returns that have been created. From here, you can double-click a VAT return and view the details.

Similar to regular suppliers, you use the User-Defined Fields tab to add custom fields to HM Revenue & Customs.

VAT menu

To view menu options for VAT, on the Company menu, point to VAT.

VAT menu options

VAT codes

VAT is collected and paid at multiple rates specified by the VAT code. Accounting 2008 is automatically set up with four VAT codes when a new company is created; E, R, S and Z. To manage the VAT codes, use the following procedure.

On the Company menu, point to VAT and then click Manage VAT Codes.

In the Manage VAT Codes dialog box, select a VAT code and click Edit.

Accounting 2008 keeps track of historical VAT rates. If HM Revenue & Customs should lower the standard VAT rate, you can modify the rate and it will be used from the As of date specified.

The VAT code is usually determined by the type of supply (product or service), but it can also be determined by the circumstances, the customer or the supplier. Most products and services use a standard rate of 17.5 percent VAT.

VAT codes on products and services

Most products and services are subject to VAT. However, some products and services are subject to reduced VAT and some are zero-rated or exempt. To define which products are subject to VAT, all products and services have a VAT code that determines how they are taxed.

Non-stock product with VAT code

Unlike products and services, the VAT code is not a required field on nominal accounts.

VAT codes on customers and suppliers

When you have customers or suppliers with special VAT treatment (for example, VAT registered in another EU country, exports and government), you can override the regular VAT codes on the sales or purchase invoice by setting a VAT code on the customer or supplier form.

Customer Details tab with VAT code

If an invoice is made for the customer shown in the preceding example, the VAT code of the individual products and services will be overridden by the VAT code of the customer.

Invoice with VAT code from customer

In the preceding example, the materials are standard rated, but the customer is exempt, therefore the VAT code on the invoice is E (tax exempt).